How to Pay for College
There's an interesting juxtaposition when a child goes to college. The child celebrates the successful culmination of years of academic pressures while the parents grapple with a different kind of pressure: how to pay for a higher education in today's troublesome economy.
"Anytime after the child is born is a good time to start saving for college," says Jim Miller, a certified financial planner with Woodward Financial Advisors in Chapel Hill. "The earlier, the better."
With tuition rates on the rise, careful financial planning is more important than ever. Todd Rose of Hinrichs Flanagan Financial in Charlotte has this advice: "If you decide that saving for college is a viable and desired option, it is important to know the options available and the facts about them. Each option carries specific rules regarding contributions and tax implications, and some can impact eligibility for financial aid."
Every state offers a 529 college savings account whose earnings or withdrawals are exempt from federal tax, provided the monies are used for qualified higher education expenses such as tuition or books.
"A 529 is a good vehicle, especially for parents of young children because you're getting that tax-free growth," Miller says. Miller also recommends the 529 as a practical option for parents with kids in middle school.
Other options include Uniform Gift to Minors (UGMA) or Uniform Transfers to Minors (UTMA) accounts. Minors gain full control of these accounts upon reaching adulthood (age 21 in North Carolina) and are free to use them as they please, except for food and shelter. A third option is a Coverdell Education Savings Account (ESA), which can be used for primary or secondary education. Coverdell ESAs allow money to grow on a tax-deferred basis and proceeds to be withdrawn tax-free for qualified education expenses at a qualified institution.
According to the International Revenue Service, qualified education expenses include tuition and certain related expenses required to enroll or attend a qualified institution, which is most public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions. Check with the educational institution to see if it's eligible.
Permanent life insurance is an option that's gaining in popularity. Certain policies can be designed to carry a cash value that grows on a tax-deferred basis and can be taken out tax-free. Use is not limited to education expenses, and the cash value is protected from creditors.
Even with a range of options, some parents don't begin planning for the expense of college until their children are in high school. What to do?
"Your options at that point are limited, Miller says.
Rose suggests parents with students in high school "keep in mind that there are options for scholarships as well as student loans that traditionally carry low interest rates as well as tax deductions on the interest."
Hit the books, consider financial assistance
In terms of scholarships, one Greensboro family has found tuition relief in the form of merit-based scholarships. Todd and Tammi Early have three children, all of whom will be in college this coming fall.
"For my kids, it was all about studying and doing well on their SATs, because there are merit-based scholarships out there for kids," Tammi says. The couples' oldest child attends the University of South Carolina. Due to her high SAT scores, she pays in-state tuition and receives a stipend each semester.
"At USC, they are up-and-coming about giving kids in-state tuition," adds Tammi, who praises similar tuition-assistance programs in Georgia and Maryland. She also stresses the importance of SAT prep classes and of the PSAT test, which is co-sponsored by the National Merit Scholarship Corporation and provides students with scholarship opportunities.
Loans are another alternative. "Loans are easy to get and are appropriate as opposed to tapping retirement accounts," Miller says. Parents may opt to pay off their child's loans or to split payments with their student.
Financial aid is a consideration, but Miller warns that parents shouldn't rely on this option since it's based on income and people often overestimate what they will quality for. Still, the Free Application for Federal Student Aid (FAFSA) is available, and the College Foundation of North Carolina (CFNC), the state's free college access information service, recommends filling it out as soon as possible after January 1 of the student's senior year in high school.
Ultimately, parents can save themselves a lot of headaches by planning early. "Unfortunately, the American way is to procrastinate and wait," Miller says. "Where you save is less important than the fact that you save."
Lee Rhodes is a freelance writer in Waxhaw, N.C.
College Payment Highlights
The following tips are provided by the College Foundation of North Carolina:
Save for college with a North Carolina 529 college savings plan. In addition to the federal tax advantages of a 529 plan, North Carolina offers a state tax deduction for contributions.
Look for grants and scholarships. North Carolina has more than $500 million a year in state programs for students with financial need.
Consider part-time work. The right balance of study and work can help you meet expenses and gain experience.
Check out low-interest federal loans. Just remember to borrow only what you need.
Borrow alternative loans only as a last resort. Alternative loans may seem easier to get than federal loans, but usually have much higher interest rates.
FOR MORE INFORMATION
Find more detail about the financial aid process, college cost estimators, listings of scholarships, grant and loan opportunities, and information about North Carolina's 529 college savings plan at www.CFNC.org. Check out Carolina Parenting's online publication at www.NCcollegeguide.com for more information about finding funds for college, the admissions process, virtual tours, the best college books and Internet resources, and links to more than 100 North Carolina colleges.